REG - CATCo Re-ins Opps Fd - Half-year Report
14/09/2022 07:01
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RNS Number : 3415Z CATCo Reinsurance Opps Fund Ltd 14 September 2022
14 September 2022
CATCo Reinsurance Opportunities Fund Ltd. (the "Company")
Interim Financial Report
For the Six Months Ended 30 June 2022
To: Specialist Fund Segment, London Stock Exchange and Bermuda Stock Exchange
Chairman's Statement
As the investment portfolios of CATCo Reinsurance Opportunities Fund Ltd. (the
"Company") are in run-off (the "Run-Off"), all remaining investments are
exposed to risk relating to reinsurance contracts entered into from 2017 to
2019, and Markel CATCo Investment Management Ltd. (the "Investment Manager")
remains focused on proactively managing the trapped capital and returning it
to Shareholders in as timely and orderly a manner as possible.
BUY-OUT TRANSACTION
On 27 September 2021, the Company announced a proposal for a Buy-Out
Transaction, which successfully completed in Q1 of 2022 and provided for,
inter alia, an accelerated return of substantially all the net asset value
("NAV") in Markel CATCo Reinsurance Fund Ltd. (the "Master Fund SAC") and the
Company (together, the "Funds") to investors in exchange for mutual releases
more fully described in the announcement. The Buy-Out Transaction terms were
improved on 26 October 2021, and it was implemented with funding provided by
Markel Corporation through Bermuda schemes of arrangement (the "Schemes")
proposed by both the Company and the Master Fund SAC.
To support the implementation of the Buy-Out Transaction through the Schemes,
each of the Company, the Master Fund SAC, the Investment Manager and Markel
CATCo Re Ltd. (the "Reinsurer") filed applications with the Supreme Court of
Bermuda for the appointment of joint provisional liquidators with limited
powers (the "JPLs"). The JPLs were appointed on 1 October 2021. On 5 October
2021, the JPLs petitioned for the provisional liquidation proceedings to be
recognised by the United States Bankruptcy Court in the Southern District of
New York. This request was subsequently granted along with other ancillary
relief.
The appointment of the JPLs and the United States recognition allowed, along
with the necessary investor support, for the smooth implementation of the
Buy-Out Transaction and approval of the Schemes. The Company did not make any
further returns of capital while the JPLs were appointed and the Buy-Out
Transaction was being considered and implemented. Following completion of the
Buy-Out Transaction, the JPLs were discharged effective 10 June 2022.
Under the improved terms of the Buy-Out Transaction, investors in the Funds
retained the right to receive any possible upside at the end of the applicable
run-off period if currently held reserves exceed the amounts ultimately
necessary to pay claims and after the repayment of the "Buy-Out Amount"
provided by affiliates of Markel Corporation to fund the return of NAV to
investors.
On 7 March 2022 at scheme meetings convened by Bermuda Court order, the Funds'
respective investors voted overwhelmingly to approve the Schemes to implement
the Buy-Out Transaction. On 11 March 2022, the Supreme Court of Bermuda
entered orders approving the Schemes. On 16 March 2022, the United States
Bankruptcy Court for the Southern District of New York entered orders
approving the enforcement in the United States of the Bermuda court
sanctioning orders pursuant to Chapter 15 of the United States Bankruptcy
Code. The Closing Date of the Buy-Out Transaction occurred on 28 March 2022 in
accordance with the terms of the Schemes.
Under the Buy-Out Transaction, the Funds' investors received an accelerated
return of 100% of the NAV of the Funds as at 31 January 2022, with investors
retaining the right to any upside at the end of the applicable run-off period
if currently-held reserves exceed the amounts advanced by affiliates of Markel
Corporation to fund the return of capital after ultimate claims related to
reinsurance loss events have been settled. Investors in the Master Fund SAC,
including the Company, also received their pro rata share of an additional
cash contribution of approximately $54 million from a Markel Corporation
affiliate, which will be used to off-set transaction costs and future running
costs of the Master Fund SAC, and to provide additional cash consideration to
investors.
In relation to the Company, the Buy-Out Transaction was implemented by way of
a redemption of 99% of the holdings of each investor, the proceeds of which
were paid to investors on 11 April 2022, amounting to $51.7m and $53.9m for
the Ordinary Shares and C Shares respectively.
Investors remain entitled, through their retained interest in the Company, to
receive the remaining assets of the Company (as and when such assets become
available for distribution and the Board determines it is appropriate to make
such distributions), including any surplus from the existing cash reserves
held by the Company and any upside following the repayment of the Buy-Out
Amount and settlement of reinsurance claims.
RETURN OF CAPITAL TO SHAREHOLDERS
Following the successful commutation of a number of 2017, 2018 and 2019
contracts during the period from 1 January 2022 to 30 June 2022, the Company
expects to return approximately $4.4m and $12.6m of capital to Ordinary
Shareholders and C Shareholders respectively, by means of compulsory share
redemption. This, it is currently anticipated, will take place in the final
quarter of 2022, and further details will be announced by the Company in due
course.
From the commencement of the Run-Off (26 March 2019) to 30 June 2022, the
Company has successfully returned $396.1m of capital to Shareholders by means
of dividends, tender offer, share buybacks, compulsory share redemptions and
completion of the Buy-Out Transaction.
Form of Return Payment or Redemption Date / Period Ordinary Shares C Shares Total
($m) ($m) ($m)
Dividend 25 February 2019 10.4 24.3 34.7
Tender Offer 23 September 2019 15.3 28.0 43.3
Interim Dividend 1 November 2019 4.0 11.9 15.9
Share Buyback Oct to Dec 2019 1.9 5.9 7.8
Partial Compulsory Redemption 1 20 April 2020 5.3 24.0 29.3
Partial Compulsory Redemption 2 18 May 2020 4.6 14.2 18.8
Partial Compulsory Redemption 3 1 July 2020 3.6 12.2 15.8
Partial Compulsory Redemption 4 1 August 2020 7.0 30.9 37.9
Partial Compulsory Redemption 5 7 October 2020 15.9 78.6 94.5
Partial Compulsory Redemption 6 11 January 2021 2.0 6.0 8.0
Partial Compulsory Redemption 7 11 May 2021 3.4 15.8 19.2
Buy-out Transaction 11 April 2022 51.7 53.9 105.6
Total Capital Return 114.7 281.4 396.1
COMMUTATIONS
The Investment Manager is continuing to proactively pursue the run-off of the
remaining 2018-2019 risk portfolios, having successfully, at the date of this
report, commuted the 2016 and 2017 contracts. Whilst the underlying risk
contracts typically have a 36-month reporting period post expiry of the risk
period, the Investment Manager has the discretion to either commute the
contract or continue to hold it open if they consider that to do so is in the
best interest of investors.
Approximately 50 per cent of the remaining 2018 Side Pocket Investments
("SPIs") were subject to commutation at 31 December 2021 and the other 50 per
cent became due for negotiation from 30 June 2022. Finally, the remaining 2019
SPIs are subject to commutation negotiation from 31 December 2022.
NET ASSET VALUE ("NAV")
The Company opened the year with a total NAV of $106.8m which consisted of
$50.6m Ordinary Share NAV and $56.2m of C Share NAV. During the first half of
the year, the NAV reduced to $18.1m, of which $4.7m relates to the Ordinary
Share NAV and $13.4m to the C Share NAV.
The overall reduction in the NAV is due to the Buy-Out Transaction. This was
implemented by way of a redemption of 99 percent of the holdings of each
investor, the proceeds of which were paid to investors on 11 April 2022
amounting to $51.7m and $53.9m for the Ordinary Shares and C Shares
respectively, offset by a reduction in claims and favourable development on
the loss reserves related to 2017-2019 catastrophe events.
2022 Ordinary Shares NAV ($m)
Opening balance 1 January 2022 $50.6
Redemptions paid from 1 January - 30 June 2022 ($51.7)
Investment appreciation net of expenses and buy-out related gains $5.8
Closing balance 30 June 2022 $4.7
2022 C Shares NAV ($m)
Opening balance 1 January 2022 $56.2
Redemptions paid from 1 January - 30 June 2022 $(53.9)
Investment appreciation net of expenses and buy-out related gains $11.1
Closing balance 30 June 2022 $13.4
SIDE POCKET INVESTMENTS ("SPIs")
As at 30 June 2022, the SPIs in total represent c. 76.42 per cent of
Ordinary Share NAV (31 December 2021: c. 97.66 per cent) and c. 68.30 per cent
of the C Share NAV (31 December 2021: c. 92.36 per cent).
The position of the 2017, 2018 and 2019 SPIs as at 30 June 2022 were as
follows:
• 2017 SPIs, principally relating to Hurricanes Harvey,
Irma and Maria and the 2017 California Wildfires, amount to c. 38.61 per cent
of the Company's Ordinary Share NAV (31 December 2021: c. 67.28 per cent of
Ordinary Share NAV)
• 2018 SPIs, principally relating to Hurricanes Michael
and Florence, Typhoon Jebi and the 2018 California Wildfires, amount to c.
19.17 per cent of Ordinary Share NAV and c. 40.66 per cent of C Share NAV (31
December 2021: c. 12.38 per cent and c. 62.41 per cent of Ordinary Share and C
Share NAV respectively)
• 2019 SPIs relating to Hurricane Dorian, Typhoons Faxai
and Hagibis and the Australian bushfires, amount to c. 18.65 per cent of
Ordinary Share NAV and c. 27.64 per cent of C Share NAV (31 December 2021: c.
8.06 per cent and c. 29.95 per cent of Ordinary Share and C Share NAV
respectively).
In respect of the underlying investments related to underwriting years
2017-2019, the Investment Manager relies on the latest available claim
information from cedants which, at this point in time, post the loss events,
supersedes the modelled losses or the insured loss estimates provided by third
parties. Whilst the Investment Manager deems the existing loss reserves are
sufficient, there is an ongoing element of uncertainty in relation to
underlying prior year loss event contracts which may lead to favourable or
adverse loss development in the future.
Overview of Investments
The following table outlines the investments held by the Ordinary Shares and C
Shares respectively:
Investments Held by Share Class:
SPI's % of Share NAV Value in millions
Ordinary Shares
SPI 2017 38.61% 1.9
SPI 2018 19.17% 0.9
SPI 2019 18.66% 0.8
C Shares
SPI 2018 40.66% 5.5
SPI 2019 27.64% 3.7
Additionally, as at 30 June 2022, cash of $1.1m and $4.2m is held by the
Ordinary Shares and C Shares respectively. Whilst it is not now possible to
determine the ultimate value of SPIs to be realised, the Investment Manager
will continue to report the fair value of underlying investments through the
issuance of Ordinary and C Share NAVs.
QUARTERLY NAV REPORTING
The Investment Manager has successfully implemented a move to quarterly
reporting of the NAV since it estimates this will generate appropriate cost
savings and, because all of the remaining cedants report their losses on a
quarterly basis, changing the Funds' NAV reporting frequency enables the
Investment Manager to track the information received from the Reinsurer's
cedants at the same pace.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
For and on behalf of the Board
14 September 2022
Directors' Report
EFFICIENT CAPITAL MANAGEMENT DURING RUN-OFF OF PORTFOLIO AND DISTRIBUTIONS
During the period from inception of the Company to 26 March 2019, the
investment objective of the Company and the Master Fund SAC was to give their
investors the opportunity to participate in the returns from investments
linked to catastrophe reinsurance risks, principally by investing in fully
collateralised Reinsurance Agreements accessed by investments in Preference
Shares of the Reinsurer.
With effect from 26 March 2019, the Company's Shareholders approved an
amendment to the Company's investment policy so as to allow an orderly Run-Off
of the Company's portfolios with the effect that the Company's investment
policy is now limited to realising the Company's assets and distributing any
net proceeds to the relevant Shareholders (after repayment of the Buy-Out
Amount, as described below). Consequently, the Company exercised a special
redemption right in respect of 100 per cent of its holding (the "Master Fund
Shares") in the Markel CATCo Diversified Fund (the "Master Fund"), a
segregated account of the Master Fund SAC, with effect from 30 June 2019 (the
"Special Redemption").
The Investment Manager announced on 25 July 2019 that it would cease accepting
new investments in the Master Fund SAC and would not write any new business
going forward through the Reinsurer. The Investment Manager then commenced the
orderly Run-Off of the Reinsurer's existing portfolio, which is expected to
take approximately three years from 1 January 2020. As part of this Run-Off,
the Master Fund SAC will return capital to its investors, including the
Company (after repayment of the Buy-Out Amount, as described below).
The Company distributed the net proceeds of the Special Redemption received
during the year ended 31 December 2019 by means of special dividend, tender
offer and share buybacks. On 6 April 2020, Shareholders approved the proposals
set out in the Shareholder Circular dated 13 March 2020 to permit the Company
to return further capital to Shareholders by means of compulsory share
redemptions. During the year ended 31 December 2021, the Company returned
$27.2m to Shareholders by means of compulsory share redemptions. On 27
September 2021, the Company announced a proposal for a buy-out transaction
(the "Buy-Out Transaction") that successfully completed in Q1 2022 and
provided for, inter alia, an accelerated return of substantially all the net
asset value (NAV) in the Master Fund SAC and the Company (together, the
"Funds") to investors. In order to implement the Buy-Out Transaction, Schemes
of Arrangement in Bermuda (the "Schemes") were overwhelmingly approved by the
Funds' respective investors at scheme meetings convened by Bermuda court order
on 7 March 2022, and sanctioned by the Bermuda court on 11 March 2022. The
"Closing Date" of the Buy-Out Transaction occurred on 28 March 2022 in
accordance with the terms of the Schemes. Under the Buy-Out Transaction, the
Funds' investors received an accelerated return of 100% of the net asset value
(NAV) of the Funds as at 31 January 2022, with investors retaining the right
to any upside at the end of the applicable run-off period if currently-held
reserves exceed the amounts advanced by affiliates of Markel Corporation to
fund the return of capital (the "Buy-Out Amount") after the settlement of
reinsurance related claims.
Investors in the Master Fund SAC, including the Company, also received their
pro rata share of an additional cash contribution of approximately $54 million
from a Markel Corporation affiliate to offset transaction costs and future
running costs of the Master Fund SAC and to provide additional cash
consideration to investors.
In relation to the Company, the Buy-Out Transaction was implemented by way of
a redemption of 99% of the holdings of each investor, the proceeds of which
were paid to investors via CREST on 11 April 2022. Investors remain entitled,
through their retained interest in the Company, to receive the remaining
assets of the Company (as and when such assets become available for
distribution and the Board determines it is appropriate to make such
distributions), including any surplus from the existing cash reserves held by
the Company and any upside following the repayment of the Buy-Out Amount.
The Directors have concluded that the Company will not raise further capital
in any circumstances, and so the Company is being wound down by means of a
managed process leading to liquidation in due course. Accordingly, the only
further business that will be undertaken is that necessary to complete the
Run-Off of each of the Company's portfolios.
The Directors remain of the view that it is currently in the best interests of
the Company for the Investment Manager to continue to manage the Run-Off,
rather than to commence a formal members' voluntary liquidation. The Directors
will keep this approach under review and currently anticipate that they will
not look to put the Company into members' voluntary liquidation until the
Run-Off is substantially completed. At such time, a further circular will be
delivered to Shareholders to convene a further meeting at which the
Shareholders will be asked to approve the liquidation.
MANAGEMENT OF RISK
The Board of Directors regularly reviews the major strategic and emerging
risks that the Board and the Investment Manager have identified, and against
these, the Board sets out the delegated controls designed to manage those
risks.
The principal risks facing the Company relate to share price, liquidity and
interest rate risk and the efficient management of the Run-Off process. Such
key risks relating to investment underwriting and strategy are managed through
investment policy guidelines and restrictions, and by the process of formal
oversight at each Board meeting. Operational disruption, accounting and legal
risks are also covered annually, and regulatory compliance is reviewed at each
Board meeting. The emergence of the coronavirus ("COVID-19") at the start of
January 2020 has not to date had a significant financial impact on the
Company, and is not expected to do so in the foreseeable future (please refer
to Note 3 to the Financial Statements ("COVID-19 Considerations"). The Board
is assured that the operational activities of the Investment Manager continue
to be substantially unaffected by COVID-19 in terms of quality and continuity,
that there are sufficient systems and controls in place to ensure the
continuity and adequacy of the services provided by the Investment Manager,
and that the Run-Off process, including returns of capital to Shareholders
(after repayment of the Buy-Out Amount, as described above) and the management
of costs and expenses, will continue to be managed efficiently. Additionally,
emerging risks in the reinsurance market are not relevant to the underlying
portfolio that is in Run-Off.
In the view of the Board, there have not been any changes to the fundamental
nature of these risks since the previous Report, and these principal risks and
uncertainties are equally applicable to the remaining six months of the
financial year as they were to the six months under review.
SHARE CAPITAL
The Company's issued share capital at 1 January 2022 amounted to 149,305,187
Ordinary Shares and 83,230,467 C Shares. As at the date of this Report, the
Company's issued share capital amounted to 1,493,131 Ordinary Shares and
832,376 C Shares, this reduction being due to the Buy-Out Transaction, which
closed on 28 March 2022 with proceeds being paid to Shareholders on 11 April
2022.
CAPITAL RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE INVESTMENT MANAGER
The Investment Manager, which was appointed as the Company's Investment
Manager on 8 December 2015, is also the investment manager of the Master Fund
SAC and the insurance manager of the Reinsurer. The Company entered into a new
investment management agreement with the Investment Manager on 28 March 2022
(the "Investment Management Agreement") in connection with the Buy-Out
Transaction. The terms of the Investment Management Agreement substantially
reflect the terms of the investment management agreement between the Company
and the Investment Manager entered into on 8 December 2015. In July 2022,
following the move to quarterly reporting announced on 14 July 2022, the
Investment Manager is entitled to a management fee, calculated and payable
quarterly in arrears equal to 1/4 of 1.5 per cent of the net asset value of
the Company which was not attributable to the Company's investment in the
Master Fund Shares as at the last calendar day of each calendar quarter. In
addition, the Investment Manager was entitled to a monthly fee payable for
secretarial, accounting and administrative services of 1/12 of $275,000. This
latter fee will no longer be charged to the Company with effect from 1 January
2022.
On 28 January 2021, the Company announced the continuation of its decision in
2020 to consent to a partial waiver of 50.00% (one-half) of the management fee
paid by the Master Fund SAC to the Investment Manager in respect of such of
its Master Fund Shares that are exposed to side pocket investments (the "SP
Management Fees") for the period 1 January 2021 to 31 December 2021, resulting
in an effective management fee of 0.75% per annum for that period. That
partial waiver will now continue in force for the foreseeable future.
Performance fees are also payable to the Investment Manager by the Master Fund
SAC, subject to certain performance targets being met. As at the date of this
report, Markel Corporation ("Markel"), which holds the entire share capital of
the Investment Manager, holds, through its asset management subsidiary, 4.24
per cent of the total voting rights of the Ordinary Shares and C Shares issued
by the Company.
In addition, one of the Directors of the Company is also a Shareholder of the
Company.
GOING CONCERN STATUS
The Company's business activities, together with the factors likely to affect
its future development, performance and position, are set out in the
Chairman's Statement.
After due and careful consideration of the Company's circumstances and
objectives as described elsewhere in this document, the Directors have
concluded that the Company has adequate financial resources to continue its
operational existence for the foreseeable future, and at least one year from
the date of this half-yearly report or until such time as the Board considers
it appropriate, having taking advice, to place the Company into voluntary
liquidation. Accordingly, the Board continues to adopt the going concern basis
in preparing these accounts.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the Half-Yearly Financial Report
in accordance with applicable law and regulations. The Directors confirm that,
to the best of their knowledge:
1. The condensed set of Financial Statements contained within
the unaudited Half-Yearly Financial Report has been prepared in accordance
with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). These
Financial Statements present fairly, in all material respects, the assets,
liabilities, financial position and profit or loss of the Company.
2. The Chairman's Statement, the Directors' Report, the
Financial Highlights and the notes to the Condensed Interim Financial
Statements provide a fair review of the information required by rule 4.2.7R of
the Disclosure Guidance and Transparency Rules (being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of unaudited Financial
Statements and a description of the principal risks and uncertainties for the
remaining six months of the financial year) and rule 4.2.8R (being related
party transactions that have taken place during the first six months of the
current financial year and that have materially affected the financial
position or performance of the Company during that period; and any changes in
the related party transactions described in the last Annual Report that could
do so).
The Half-Yearly Financial Report was approved by the Board on
14 September 2022, and the above responsibility statement was signed on its
behalf by the Chairman.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
For and on behalf of the Board
14 September 2022
CONDENSED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States Dollars) Six months to 30 June 2022 (Unaudited) Six months to 30 June 2021 (Unaudited) Year ended
31 Dec. 2021 (Audited)
$ $ $
Assets
Investments in Master Fund, at fair value (Note 4) 12,790,043 85,118,306 101,307,151
Cash and cash equivalents (Note 2) 8,831,376 6,405,020 5,606,161
Other assets 45,416 31,884 59,963
Total assets 21,666,835 91,555,210 106,973,275
Liabilities
Management fee payable 79,387 3,709 3,420
Accrued expenses and other liabilities 132,452 502,786 193,343
Due to Markel CATCo Reinsurance Fund Ltd. - Markel CATCo Diversified Fund 200,920 - -
Schemes of Arrangement Buy-Out Transaction Costs (Note 6 and Note 12) 167,813 - -
Schemes of Arrangement Buy-Out Ordinary Course Fees (Note 6 and Note 12) 2,932,754 - -
Total liabilities 3,513,326 506,495 196,763
Net assets 18,153,509 91,048,715 106,776,512
NAV per Share (Note 6)
CONDENSED STATEMENTS OF OPERATIONS
(Expressed in United States Dollars) Six months to 30 June 2022 (Unaudited) Six months to 30 June 2021 (Unaudited) Year ended 31 Dec. 2021 (Audited)
$ $ $
Net investment loss allocated from
Master Fund (Note 4)
Interest income 4,482 708 1,074
Schemes of Arrangement Buy-Out Transaction Costs (Note 6 and Note 12) (27,380) (3,677,284) (4,437,070)
Schemes of Arrangement Buy-Out Ordinary Course Fees (Note 6 and Note 12) (961,225) - -
Management fee waived (Note 8) 84,924 337,865 684,764
Management fee (Note 8) (169,848) (675,730) (1,369,528)
Professional fees and other (37,204) (56,419) (116,558)
Administrative fee (43,651) (48,998) (112,234)
Net investment loss allocated from Master Fund (1,149,902) (4,119,858) (5,349,552)
Investment income
Interest 8,453 347 657
Total investment income 8,453 347 657
Company expenses
Management fee waived (Note 8) 152,073 35,121 56,526
Professional fees and other (376,974) (486,685) (659,723)
Management fee (Note 8) (304,146) (70,242) (113,052)
Administrative fee (Note 9) (37,500) (37,500) (75,000)
Schemes of Arrangement Buy-Out Transaction Costs (Note 6 and Note 12) (368,733) - (229,415)
Schemes of Arrangement Buy-Out Ordinary Course Fees (Note 6 and Note 12) (2,932,754) - -
Total Company expenses (3,868,034) (559,306) (1,020,664)
Net investment loss (5,009,483) (4,678,817) (6,369,559)
Net realised loss and net change in unrealised loss on securities allocated
from Master Fund (Note 4)
Realised gain on Schemes of Arrangement Buy-Out Transaction 9,204,153 - -
Net realised loss on securities (17,788,652) (8,088,046) (63,096,478)
Net change in unrealised loss on securities 30,555,616 19,169,097 91,596,068
Net gain / (loss) on securities allocated from Master Fund 21,971,117 11,081,051 28,499,590
Net increase / (decrease) in net assets resulting from operations 16,961,634 6,402,234 22,130,031
CONDENSED STATEMENTS CHANGE IN NET ASSETS
(Expressed in United States Dollars) Six months to Six months to 30 June 2021 (Unaudited) Year ended 31 Dec. 2021
30 June 2022 (Unaudited)
(Audited)
$ $ $
Operations
Net investment loss (5,009,483) (4,678,817) (6,369,559)
Realised gain on Schemes of Arrangement Buy-Out Transaction 9,204,153 - -
Net realised loss on securities allocated from Master Fund (17,788,652) (8,088,046) (63,096,478)
Net change in unrealised loss on securities allocated from Master Fund 30,555,616 19,169,097 91,596,068
Net increase / (decrease) in net assets resulting from operations 16,961,634 6,402,234 22,130,031
Capital share transactions
Repurchase of Class Ordinary Shares (Note 6) (51,727,869) (5,399,961) (5,399,961)
Repurchase of Class C Shares (Note 6) (53,856,768) (21,799,929) (21,799,929)
Net decrease in net assets resulting from capital share transactions (105,584,637) (27,199,890) (27,199,890)
Net decrease in net assets (88,623,003) (20,797,656) (5,069,859)
Net assets, beginning of period 106,776,512 111,846,371 111,846,371
Net assets, end of period 18,153,509 91,048,715 106,776,512
CONDENSED STATEMENTS OF CASH FLOW
(Expressed in United States Dollars) Six months to Six months to Year ended 31 Dec. 2021 (Audited)
30 June 2022
30 June 2021
(Unaudited)
(Unaudited)
$ $ $
Cash flows from operating activities
Net increase / (decrease) in net assets resulting from operations 16,961,634 6,402,234 22,130,031
Adjustments to reconcile net decrease in net assets resulting from operations
to net cash provided by operating activities
Net investment loss, net realised loss on (20,821,215) (6,961,193) (23,150,038)
securities and net change in unrealised loss on securities allocated from
Master Fund
Sale of investment in Markel CATCo Reinsurance Fund Ltd. - Markel CATCo 109,338,323 19,212,976 19,212,976
Diversified Fund
Changes in operating assets and liabilities
Due from Markel CATCo Reinsurance Fund Ltd. - Markel CATCo Diversified Fund 200,920 10,696,244 10,696,244
Other assets 14,547 21,485 (6,594)
Schemes of Arrangement Buy-Out Transaction Costs (Note 6 and Note 12) 167,813 - -
Schemes of Arrangement Buy-Out Ordinary Course Fees (Note 6 and Note 12) 2,932,754 - -
Management fee payable 75,967 (5,344) (5,633)
Accrued expenses and other liabilities (60,891) (29,878) (339,321)
Net cash provided by operating activities 108,809,852 29,336,524 28,537,665
Cash flows from financing activities
Repurchase of Class Ordinary Shares (51,727,869) (5,399,961) (5,399,961)
Repurchase of Class C Shares (53,856,768) (21,799,929) (21,799,929)
Net cash used in financing activities (105,584,637) (27,199,890) (27,199,890)
Net increase in cash and cash equivalents 3,225,215 2,136,634 1,337,775
Cash and cash equivalents, beginning of period 5,606,161 4,268,386 4,268,386
Cash and cash equivalents, end of period 8,831,376 6,405,020 5,606,161
NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS - 30 JUNE 2022
(Expressed in United States Dollars)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
CATCo Reinsurance Opportunities Fund Ltd. (the "Company") is a closed-ended
mutual fund company, registered and incorporated as an exempted mutual fund
company under the laws of Bermuda on 30 November 2010, which commenced
operations on 20 December 2010. The Company is organised as a feeder fund to
invest substantially all of its assets in Markel CATCo Diversified Fund (the
"Master Fund"). The Master Fund is a segregated account of Markel CATCo
Reinsurance Fund Ltd. (the "Master Fund SAC"), a mutual fund company
incorporated in Bermuda and registered as a segregated account company under
the Segregated Accounts Company Act 2000, as amended (the "SAC Act"). Markel
CATCo Reinsurance Fund Ltd. establishes a separate account for each class of
shares comprised in each segregated account (each, a "SAC Fund"). Each SAC
Fund is a separate individually managed pool of assets constituting, in
effect, a separate fund with its own investment objective and policies. The
assets attributable to each SAC Fund of Markel CATCo Reinsurance Fund Ltd.
shall only be available to creditors in respect of that segregated account.
The objective of the Master Fund is to provide Shareholders the opportunity to
participate in the investment returns of various fully-collateralised
reinsurance-based instruments, securities (such as notes, swaps and other
derivatives), and other financial instruments. The majority of the Master
Fund's exposure to reinsurance risk is obtained through its investment (via
preference shares) in Markel CATCo Re Ltd. (the "Reinsurer"). At 30 June 2022,
the Company's ownership is 15.54 per cent of the Master Fund.
On 25 July 2019, the Board of Directors (the "Board") announced that the
Company will cease accepting new investments and will not write any new
business going forward through the Reinsurer. As of this date, the Investment
Manager commenced the orderly Run-Off (the "Run-Off") of the Reinsurer's
existing portfolio, which is reasonably expected to be completed in the first
half of 2023. As part of this Run-Off, the Company will return capital (which
will continue to be subject to side pockets) to investors as such capital
becomes available (after repayment of the Buy-Out Amount, as described
below). Refer to Going Concern Considerations under Basis of Presentation
below.
On 27 September 2021, the Company announced a proposal for a buy-out
transaction (the "Buy-Out Transaction") that would provide for, inter alia, an
accelerated return of substantially all the net asset value ("NAV") in the
Master Fund SAC and the Company (together, the "Funds") to investors
(further details of the Buy-Out Transaction appear in the Chairman's Statement
and the Directors' Report). To support the implementation of the Buy-Out
Transaction through the Schemes of Arrangement in Bermuda (the "Schemes"),
each of the Company, the Master Fund SAC, the Investment Manager and the
Reinsurer filed applications with the Supreme Court of Bermuda for the
appointment of joint provisional liquidators with limited powers (the "JPLs").
On 1 October 2021 the JPLs were appointed. On 5 October 2021, the JPLs
petitioned for the provisional liquidation proceedings to be recognised by the
U.S. Bankruptcy Court in the Southern District of New York, which request was
subsequently granted along with other ancillary relief.
The appointment of the JPLs and U.S. recognition allowed, along with the
necessary investor support, for the smooth implementation of the Buy-Out
Transaction and approval of the Schemes. The Company did not make any further
returns of capital while the JPLs were appointed and the Buy-Out Transaction
was being considered and implemented.
Upon the expiry of the "Early Consent Deadline" for the Buy-Out Transaction on
22 October 2021, investors representing over 90% of the Master Fund SAC and
investors representing over 95% of the Company had entered into support
undertakings or otherwise indicated their support for the Buy-Out Transaction.
On 26 October 2021, it was announced that Markel Corporation had agreed to
increase the funding it would provide, to facilitate certain improvements to
the terms of the Buy-Out Transaction. The improvements resulted in the buy-out
of all segregated accounts of the Funds, plus an additional cash distribution
to investors by way of an increased consent fee and other cash consideration
provided by Markel Corporation and its affiliates. On 28 October 2021, the
Funds launched the Schemes to implement the Buy-Out Transaction.
Under the improved terms of the Buy-Out Transaction, investors in the Funds
retained the right to receive any possible upside at the end of the applicable
Run-Off period if currently held reserves exceed the amounts ultimately
necessary to pay claims and after the repayment of the "Buy-Out Amount"
provided by affiliates of Markel Corporation to fund the return to NAV of
investors. The affiliates of Markel Corporation financing the Buy-Out
Transaction expect to receive a return of all the Buy-Out Amount by the end of
the Run-Off periods.
On 3 February 2022, the Investment Manager, the Master Fund SAC and Markel
Corporation entered into a settlement agreement with certain investors that
had opposed the Schemes (the "Litigation Claimants"), which resolved their
opposition to the Schemes and certain litigation brought against a former
officer of the Investment Manager in the U.S. (the "Settlement"). Pursuant to
the Settlement, the Litigation Claimants withdrew their opposition to the
Schemes and, following the Closing Date of the Buy-Out Transaction, the
Litigation Claimants received (i) the NAV of their Master Fund SAC shares in
full and final satisfaction of their interests in the Master Fund SAC and (ii)
an aggregate additional payment of $20 million funded by Markel Corporation
and D&O insurance coverage in consideration for granting the releases of
their claims and dismissing with prejudice the U.S. litigation.
On 7 March 2022 at scheme meetings convened by Bermuda court order, the Funds'
respective investors voted overwhelmingly to approve the Schemes to implement
the Buy-Out Transaction. On 11 March 2022, the Supreme Court of Bermuda
entered orders approving the Schemes. On 16 March 2022, the United States
Bankruptcy Court for the Southern District of New York entered orders
approving the enforcement in the United States of the Bermuda court
sanctioning orders pursuant to Chapter 15 of the United States Bankruptcy
Code. The Closing Date of the Buy-Out Transaction occurred on 28 March 2022 in
accordance with the terms of the Schemes.
Under the Buy-Out Transaction, the Funds' investors received an accelerated
return of 100% of the NAV of the Funds as at 31 January 2022, with investors
retaining the right to any upside at the end of the applicable Run-Off period
if currently held reserves exceed the amounts advanced by affiliates of Markel
Corporation to fund the return of capital after the ultimate claims related to
reinsurance loss events have been settled. Investors in the Master Fund SAC,
including the Company, also received their pro rata share of an additional
cash contribution of approximately $54 million from a Markel Corporation
affiliate to off-set transaction costs and future running costs of the Master
Fund SAC and to provide additional cash consideration to investors.
In relation to the Company, the Buy-Out Transaction was implemented by way of
a redemption of 99% of the holdings of each investor in the Master Fund, the
proceeds of which, along with all additional consideration, were paid to
investors on 11 April 2022 amounting to $51.7m and $53.9m for Ordinary Shares
and C Shares respectively.
Investors remain entitled, through their retained interest in the Company, to
receive the remaining assets of the Company (as and when such assets become
available for distribution and the Board determines it is appropriate to make
such distributions), including any surplus from the existing cash reserves
held by the Company and any upside following the repayment of the Buy-Out
Amount.
The Investment Manager is subject to the ultimate supervision of the Board,
and is responsible for all of the Company's investment decisions. On 1
January 2020, the Investment Manager entered into a Run-Off Services Agreement
with Lodgepine Capital Management Limited ("LCML"), under which LCML will
provide services relating to the management of the Run-Off business of the
Investment Manager. On 15 November 2021, Markel announced its intention to
wind down LCML, its retrocessional Insurance Linked Securities (ILS) fund
manager based in Bermuda.
The Reinsurer is a Bermuda licensed Class 3 reinsurance company, registered as
a segregated account company under the SAC Act, through which the Master Fund
accesses the majority of its reinsurance risk exposure. The Reinsurer forms a
segregated account that corresponds solely to the Master Fund's investment in
the Reinsurer with respect to each particular reinsurance agreement.
The Reinsurer focuses primarily on property catastrophe insurance and may be
exposed to losses arising from hurricanes, earthquakes, typhoons, hailstorms,
winter storms, floods, tsunamis, tornados, windstorms, extreme temperatures,
aviation accidents, fires, wildfires, explosions, marine accidents, terrorism,
satellite, energy and other perils.
The Company's shares are listed and traded on the Specialist Fund Segment of
the Main Market of the London Stock Exchange ("SFS"). The Company's shares are
also listed on the Bermuda Stock Exchange ("BSX").
Basis of Presentation
The interim condensed Financial Statements are expressed in United States
dollars and have been prepared in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") for interim
financial information. Accordingly, certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with U.S. GAAP have been condensed pursuant to such guidance. These
interim condensed financial statements should be read in conjunction with the
annual financial statements and related notes as of 31 December 2021 which
are readily available on the Regulatory News Service ("RNS") of the London
Stock Exchange. The Company is an investment company and follows the
accounting and reporting guidance contained within Topic 946, "Financial
Services Investment Companies", of the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC").
Going Concern Considerations
In accordance with ASC 205-40-50, Presentation of Financial Statements-Going
Concern, the Investment Manager and the Board have reviewed the Company's
ability to continue as a going concern and have confirmed their intent to
continue to Run-Off the Company's portfolios as a going concern with no
imminent plans to liquidate the Company. The Investment Manager and the Board
have concluded that the Company has sufficient financial resources to continue
as a going concern based on the following key considerations: (i) the Company
holds investments in the Master Fund which are supported by underlying fully
collateralised reinsurance contracts in the Reinsurer that are expected to be
settled on or around 31 December 2022, and (ii) the Investment Manager and the
Board have reviewed the Company's cash forecast for 18 months from the date of
this report and have determined that the Company has sufficient cash to
adequately meet operational expenses. Based on the aforementioned reasons, the
Company continues to adopt the going concern basis in preparing the financial
statements for the six-month period ended 30 June 2022.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid investments, such
as money market funds, that are readily convertible to known amounts of cash
and have original maturities of three months or less.
Valuation of Investments in the Master Fund
The Company records its investments in the Master Fund at fair value based
upon an estimate made by the Investment Manager, in good faith and in
consultation or coordination with Centaur Fund Services (Bermuda) Limited (the
"Administrator"), as defined in Note 4, where practicable, using what the
Investment Manager believes in its discretion are appropriate techniques
consistent with market practices for the relevant type of investment. Fair
value in this context depends on the facts and circumstances of the particular
investment, including but not limited to prevailing market and other relevant
conditions, and refers to the amount for which a financial instrument could be
exchanged between knowledgeable, willing parties in an arm's length
transaction. Fair value is not the amount that an entity would receive or pay
in a forced transaction or involuntary liquidation.
Financial Instruments
The fair values of the Company's assets and liabilities, which qualify as
financial instruments under ASC 825, "Financial Instruments", approximate the
carrying amounts presented in the Statements of Assets and Liabilities.
Investment Transactions and Related Investment Income and Expenses
The Company records its proportionate share of the Master Fund's income,
expenses, realised and unrealised gains and losses on investment in securities
on a monthly basis through 30 June 2022 and will do so on a quarterly basis
going forward. In addition, the Company incurs and accrues its own income and
expenses.
Investment transactions of the Master Fund are accounted for on a trade-date
basis. Realised gains or losses on the sale of investments are calculated
using the specific identification method of accounting. Interest income and
expense are recognised on the accrual basis.
Translation of Foreign Currency
Assets and liabilities denominated in foreign currencies are translated into
United States dollar amounts at the period-end exchange rates. Transactions
denominated in foreign currencies, including purchases and sales of
investments, and income and expenses, are translated into United States dollar
amounts on the transaction date. Adjustments arising from foreign currency
transactions are reflected in the Statements of Operations.
The Company does not isolate the portion of the results of operations arising
from the effect of changes in foreign exchange rates on investments from
fluctuations arising from changes in market prices of investments held. Such
fluctuations are included in net gains or losses on securities in the
Statements of Operations.
Income Taxes
Under the laws of Bermuda, the Company is generally not subject to income
taxes. The Company has received an undertaking from the Minister of Finance of
Bermuda, under the Exempted Undertakings Tax Protection Act 1966, that in the
event that there is enacted in Bermuda any legislation imposing income or
capital gains tax, such tax shall not until 31 March 2035 be applicable to the
Company. However, certain United States dividend income and interest income
may be subject to a 30% withholding tax. Further, certain United States
dividend income may be subject to a tax at prevailing treaty or standard
withholding rates with the applicable country or local jurisdiction.
The Company is required to determine whether its tax positions are more likely
than not to be sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. The tax benefit recognised is measured
as the largest amount of benefit that has a greater than fifty per cent
likelihood of being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax benefit previously recognised results in
the Company recording a tax liability that reduces ending net assets. Based on
its analysis, the Company has determined that it has not incurred any
liability for unrecognised tax benefits as of 30 June 2022. However, the
Company's conclusions may be subject to review and adjustment at a later date
based on factors including, but not limited to, on-going analyses of and
changes to tax laws, regulations and interpretations thereof.
The Company recognises interest and penalties related to unrecognised tax
benefits in interest expense and other expenses, respectively. No tax-related
interest expense or penalties have been recognised as of and for the period
ended 30 June 2022.
Generally, the Company may be subjected to income tax examinations by relevant
major taxing authorities for all tax years since its inception.
The Company may be subject to potential examination by United States federal
or foreign jurisdiction authorities in the areas of income taxes. These
potential examinations may include questioning the timing and amount of
deductions, the nexus of income among various tax jurisdictions and compliance
with United States federal or foreign tax laws. The Company was not subjected
to any tax examinations during the six month period ended 30 June 2022.
Use of Estimates
The preparation of Financial Statements in conformity with U.S. GAAP requires
the Company's management to make estimates and assumptions in determining the
reported amounts of assets and liabilities, including fair value of
investments, the disclosure of contingent assets and liabilities as of the
date of the Financial Statements, and the reported amounts of income and
expenses during the reported period. Actual results could differ from those
estimates.
Offering Costs
The costs associated with each capital raise are expensed against paid-in
capital and the Company's existing cash reserves as incurred.
Premium and Discount on Share Issuance
Issuance of shares at a price in excess of the Net Asset Value (the "NAV") per
share at the transaction date results in a premium and is recorded as paid-in
capital. Discounts on share issuance are treated as a deduction from paid-in
capital.
Other Matters
Markel CATCo Governmental Inquiries
Markel Corporation previously reported that the U.S. Department of Justice,
U.S. Securities and Exchange Commission and Bermuda Monetary Authority
(together, the "Governmental Authorities") had been conducting inquiries (the
"Markel CATCo Inquiries") into loss reserves recorded in late 2017 and early
2018 at the Investment Manager and its subsidiaries (collectively, "Markel
CATCo"). Those reserves were held at Markel CATCo Re Ltd., an unconsolidated
subsidiary of the Investment Manager. The Markel CATCo Inquiries were limited
to Markel CATCo and did not involve Markel Corporation or its other
subsidiaries.
Markel Corporation retained outside counsel to conduct an internal review of
Markel CATCo's loss reserving in late 2017 and early 2018. The internal review
was completed in April 2019 and found no evidence that Markel CATCo personnel
acted in bad faith in exercising business judgment in the setting of reserves
and making related disclosures during late 2017 and early 2018. Markel
Corporation's outside counsel met with the Governmental Authorities and
reported the findings from the internal review.
On 27 September 2021, Markel Corporation was notified by the U.S. Securities
and Exchange Commission that it had concluded its investigation and it did not
intend to recommend an enforcement action against Markel CATCo. Additionally,
On 28 September 2021, the U.S. Department of Justice advised Markel
Corporation that it had concluded its investigation and would not take any
action against Markel CATCo. There are currently no pending requests from the
Bermuda Monetary Authority.
California Bankruptcy Court and the PG&E Settlement (at August 2022)
The Investment Manager believes that any subrogation benefitting Markel CATCo
was substantially realised as at 31 December 2021 through reductions in
updated cedant loss reports. Therefore, the Investment Manager is of the view
that the benefits of such subrogation are reflected in the Company's
investments in the underlying participating shares of the Reinsurer.
2. CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company maintains its cash balances (not
assets supporting retrocessional reinsurance transactions) in financial
institutions, which at times may exceed federally insured limits. The Company
is subject to credit risk to the extent any financial institution with which
it conducts business is unable to fulfill contractual obligations on its
behalf. Management monitors the financial condition of such financial
institutions and does not anticipate any losses from these counterparties. At
30 June 2022, cash and cash equivalents were held with HSBC Bank Bermuda Ltd.,
which has a credit rating of A-/A-2, and with HSBC Global Asset Management
(USA) Inc., which has a credit rating of A/A-2 as issued by Standard &
Poor's.
3. COVID-19 CONSIDERATIONS
As at 30 June 2022, the Board and the Investment Manager have concluded that
the recent outbreak of the novel Coronavirus ("COVID-19") at the start of
January 2020 did not have a significant financial impact on the Company's
going concern assessment. There was minimal disruption in operational
activities. The fluidity of COVID-19 precludes any prediction to its ultimate
impact, which may have a continued adverse impact on economic and market
conditions and trigger a period of global economic slowdown.
The Investment Manager continues to monitor developments relating to COVID-19
and is coordinating its operational response based on existing business
continuity plans and on guidance from global health organisations, relevant
governments, and general pandemic response best practices.
4. INVESTMENTS IN MASTER FUND, AT FAIR VALUE
The following table summarises the Company's Investment in the Master Fund as
at 30 June 2022:
(Expressed in United States Dollars) 30 June 2022
$
Investment in Markel CATCo Reinsurance Fund Ltd. - 12,790,043
Markel CATCo Diversified Fund, at fair value
During this period, the net investment loss, and net realised loss on
securities allocated from the Master Fund in the Statements of Operations
included gross realised gains on securities of $15,334,984 and gross realised
loss on securities of $33,123,636. Over the same period, the net change in
unrealised gain on securities allocated from the Master Fund included gross
unrealised gains of $37,104,410 and gross unrealised loss of $6,548,794.
5. LOSS RESERVES
The following disclosures on loss reserves are included for information
purposes and relate specifically to the Reinsurer and are reflected through
the valuations of investments held by the Company through the Master Fund.
The reserve for unpaid losses and loss expenses recorded by the Reinsurer
includes estimates for losses incurred but not reported as well as losses
pending settlement. The Reinsurer makes a provision for losses on contracts
only when an event that is covered by the contract has occurred. When a
potential loss event has occurred, the Reinsurer uses the underlying cedant
loss notifications along with management's judgement as deemed appropriate to
estimate the level of reserves required. The process of estimating loss
reserves is a complex exercise, involving many variables and a reliance on
actuarial modeled catastrophe loss analysis. However, there is no precise
method for evaluating the adequacy of loss reserves when industry loss
estimates are not final, and actual results could differ from original
estimates. In addition, the Reinsurer's reserves may include an implicit risk
margin to reflect uncertainty surrounding cash flows relating to loss
reserves. The risk margin is set by the actuarial team of the Investment
Manager.
Future adjustments to the amounts recorded as of 30 June 2022, resulting from
the continual review process, as well as differences between estimates and
ultimate settlements, will be reflected in the Reinsurer's Statements of
Operations in future periods when such adjustments become known. Future
developments may result in losses and loss expenses materially greater or less
than the reserve provided.
Markel CATCo Investment Management Ltd., (the "Insurance Manager"), believes
that the total loss reserve established from the previous years is sufficient
to provide for all unpaid losses and loss expenses based on best estimates of
ultimate settlement values and on the industry loss information currently
available. Inherent uncertainty with regard to the final insured loss impact
of the 2018 and 2019 loss events continues. Therefore, actual results may
materially differ if actual reinsured client losses differ from the
established loss reserves. This could result in the need to further adjust
loss reserves, either in the event that reserves are found to be insufficient
or, conversely, if loss reserves are found to be too conservative.
As part of the ongoing reserving process, the Insurance Manager reviews loss
reserves on a monthly basis and will make adjustments, if necessary, and such
future adjustments in loss reserves could have further material impact either
favourably or adversely on investor earnings.
In the six-month period ended 30 June 2022, the Reinsurer paid net claims of
$90,778,724. Of this amount, $57,733,505 related to the 2017 loss events,
$23,776,501 related to the 2018 loss events and $9,268,718 was paid in respect
of 2019 loss events.
6. CAPITAL SHARE TRANSACTIONS
As of 30 June 2022, the Company has authorised share capital of 1,500,000,000
unclassified shares of US$0.0001 each and Class B Shares ("B Shares") of such
nominal value as the Board may determine upon issue.
As of 30 June 2022, the Company had issued 1,493,131 Class 1 Ordinary Shares
(the "Ordinary Shares"), and 832,376 Class C Shares (the "C Shares").
Transactions in shares during the year, shares outstanding, NAV and NAV per
share are as follows:
30 June 2022 Beginning Share Share Ending Shares Ending Net Assets Ending NAV Per Share
Shares
Redemptions
Issuance
Class 1 - 149,305,187 (147,812,056) - 1,493,131 $4,797,522 $3.2131
Ordinary Shares
Class C Shares 83,230,467 (82,398,091) - 832,376 $13,355,987 $16.0456
Total 232,535,654 (230,210,147) - 2,325,507 $18,153,509
The Company has been established as a closed-ended mutual fund and, as such,
Shareholders do not have the right to redeem their shares. The shares are held
in trust by Link Market Services (the "Depository") in accordance with the
Depository Agreement between the Company and the Depository. The Depository
holds the shares and in turn issues depository interests in respect of the
underlying shares.
The Board has the ability to issue one or more classes of C Share during any
period when the Master Fund has designated one or more investments as Side
Pocket Investments. This typically will happen if a covered or other
pre-determined event has recently occurred or seems likely to occur under an
Insurance-Linked Instrument. In such circumstances, only those Shareholders on
the date that the investment has been designated as a Side Pocket Investment
will participate in the potential losses and premiums attributable to such
Side Pocket Investment. Any shares issued when Side Pocket Investments exist
will be as one or more classes of C Share that will participate in all of the
Master Fund's portfolio other than in respect of potential losses and premiums
attributable to any Side Pocket Investments in existence at the time of issue.
If no Side Pocket Investments are in existence at the time of proposed issue,
it is expected that the Company will issue further Ordinary Shares.
The Company's existing portfolio is currently in Run-Off and as a result only
SPI Shares are outstanding.
The Company issued a circular to Shareholders dated 28 February 2019 (the
"February 2019 Circular") concerning the proposed implementation of the
orderly Run-Off of the Company's portfolios by means of a change to the
Company's investment policy to enable the Company to redeem all of the
Company's Master Fund Shares attributable to the Ordinary or C Shares, as the
case may be (the "Proposals"), and distributing the net proceeds thereof to
the relevant class of Shareholders. The Proposals were approved at class
meetings of the Ordinary and C Shareholders of the Company held on 26 March
2019.
On 13 March 2020 the Company issued a circular to Shareholders announcing that
the Company will not raise further capital in any circumstances, and so the
Company is being terminated by means of a managed process ("Compulsory
Redemptions") leading to liquidation in due course. As discussed in Note 1, on
27 September 2021 the Company announced the terms of the Buy-Out Transaction,
which facilitated an accelerated return of substantially all the net asset
value to the Shareholders of the Company.
Following the completion of the necessary applicable conditions precedent to
complete the Buy-Out of the Company's portfolios, the Closing Date of the
Schemes of Arrangement to implement the Buy-Out Transaction occurred on 28
March 2022. Under the Buy-Out Transaction, the Company received an accelerated
return of 100% of the NAV of its investment in the Master Fund as at 31
January 2022, with investors retaining the right to any upside at the end of
the applicable Run-Off period if currently held reserves exceed the Buy-Out
Amount; and their pro rata share of an additional cash contribution of
approximately $54 million from a Markel Corporation affiliate, to off-set
transaction costs and future running costs of the Master Fund SAC and to
provide additional cash consideration to investors.
In relation to the Company, the Buy-Out Transaction was implemented by way of
a redemption of 99% of the holdings of each investor.
Consent Fees
The Early Consent Fee due to investors was paid on 30 March 2022 mostly
through CREST to the accounts of holders of shares that issued a valid
Transfer to Escrow Instruction, irrespective of whether such accounts continue
to hold Public Fund Shares.
The Early Consent Fee paid per Share was:
Early Consent Fee per Ordinary Share: $0.00676446
Early Consent Fee per C Share: $0.01347267
Redemption of Shares
On 6 April 2022, the Company redeemed 147,812,056 Ordinary Shares at a rate of
USD 0.349957 per Ordinary Share (approximately USD 0.3465 per Ordinary Share
held on the basis of 100% of each Shareholder's then outstanding Shares) and
82,398,091 C Shares at a rate of USD 0.653616 per C Share (approximately USD
0.6471 per C Share held on the basis of 100% of each Shareholder's then
outstanding Shares). Following this redemption, the Company now has 1,493,131
Ordinary Shares in issue and 832,376 C Shares in issue with the Company's
Ordinary Shares trading under the new ISIN number BMG1961Q4075 and the C
Shares will trade under the new ISIN number BMG1961Q5064.
The resulting proceeds from the redemption, amounting to $51.7m for Ordinary
Shares and $53.9m for C Shares, were paid to Shareholders on 11 April 2022.
7. INVESTMENT MANAGEMENT AGREEMENT
Prior to the implementation of the Buy-Out Transaction, the Company's
investments were managed pursuant to an Investment Management Agreement dated
8 December 2015 (the "Old Investment Management Agreement"). In connection
with the Buy-Out Transaction, on 28 March 2022 the Old Investment Management
Agreement was terminated and the Company and the Investment Manager entered
into a new Investment Management Agreement (the "Investment Management
Agreement"), the terms of which substantially mirrored those of the Old
Investment Management Agreement. Pursuant to the Investment Management
Agreement, the Investment Manager is empowered to formulate the overall
investment strategy to be carried out by the Company and to exercise full
discretion in the management of the trading, investment transactions and
related borrowing activities of the Company in order to implement such
strategy. The Investment Manager earns a fee for such services (Note 8).
The Investment Manager also acts as the Master Fund SAC's investment manager
and the Reinsurer's insurance manager.
On 1 January 2020, the Investment Manager entered into a Run-Off Services
Agreement with Lodgepine Capital Management Limited ("LCML"), a subsidiary of
Markel Corporation, under which, LCML will provide services relating to the
management of the Run-Off business of the Investment Manager. LCML earns a fee
from the Investment Manager for such services. On 15 November 2021, Markel
announced its intention to wind down LCML, its retrocessional Insurance Linked
Securities ("ILS") fund manager based in Bermuda, effective 1 January 2022.
8. RELATED PARTY TRANSACTIONS
The Investment Manager is entitled to a management fee, calculated and payable
monthly in arrears equal to 1/12 of 1.5 per cent of the net asset value, which
is not attributable to the Company's investment in the Master Fund's shares as
at the last calendar day of each calendar month. Management fees related to
the investment in the Master Fund shares are charged in the Master Fund and
allocated to the Company. Performance fees are charged in the Master Fund and
allocated to the Company. The fees payable under the Investment Management
Agreement are the same as those which had been payable under the Old
Investment Management Agreement.
On 28 January 2021, the Investment Manager agreed to maintain the partial
waiver of 50.00 per cent of the annual Management Fee on Side Pocket
Investments of the original fee of 1.50 per cent. This is equal to an annual
Management Fee of 0.75 per cent. This partial waiver has been maintained for
the six months ended 30 June 2022 and will continue in force for the
foreseeable future.
Markel Corporation, which holds the entire share capital of the Investment
Manager, holds 6.61 per cent of the voting rights of the Ordinary Shares and
0.00 per cent of the voting rights of the C Shares issued in the Company as of
30 June 2022. This equates to a holding of 4.24 per cent of the combined
voting rights of the Company's Ordinary and C Shares in issue.
As noted in Note 7, on 1 January 2020, the Investment Manager entered into a
Run-Off Services Agreement with LCML, a subsidiary of Markel Corporation. LCML
receives a monthly service fee of 75.00 per cent of the net management fees
due to the Investment Manager.
In addition, as at 30 June 2022, one of the Directors is also a Shareholder of
the Company. The Director's holdings are immaterial, representing below 1.00
per cent of the Company NAV.
9. ADMINISTRATIVE FEE
Centaur Fund Services (Bermuda) Limited serves as the Company's Administrator.
As a licensed fund administrator pursuant to the provisions of the Bermuda
Investment Funds Act, the Administrator performs certain administrative
services on behalf of the Company. The Administrator receives a fixed monthly
fee.
10. FINANCIAL HIGHLIGHTS
Financial highlights for the period from 1 January to 30 June 2022 are as
follows:
Class 1 - Class C
Ordinary Shares
Shares
Per share operating performance
Net asset value, beginning of period $ 0.3389 0.6750
Income (loss) from investment operations
Net investment income (loss) (0.0079) (0.0056)
Management fee charged (0.0047) (0.0183)
Net gain on investments 1.9964 7.3114
Total Income from investment operations 1.9838 7.2875
Discount on Buy-Out Transaction 0.8904 8.0831
Net asset value, end of period $ 3.2131 16.0456
Total net asset value return
Total net asset value return before performance fee 585.36% 1079.63%
Performance fee 0.00% 0.00%
Total net asset value return after performance fee^ 585.36% 1079.63%
Ratios to average net assets
Expenses other than performance fee ** -4.52% -5.33%
Performance fee 0.00% 0.00%
Total expenses after performance fee -4.52% -5.33%
Net investment income (loss) -3.72% -3.54%
Management fee waived -0.24% -0.25%
^ Adjusting the opening capital to reflect the Buy-Out Transaction
redemptions paid in April 2022, the normalised total return for 2022 is
equivalent to 241.13% and 139.84% for the Ordinary and C Shares respectively.
** Expenses presented above is net of management fees waived by the
Master Fund (Note 8). Financial highlights are calculated for each class of
shares. An individual Shareholder's return may vary based on the timing of
capital transactions. Returns and ratios shown above are for the six-month
period ended 30 June 2022 and have not been annualised. The per share amounts
and ratios reflect income and expenses allocated from the Master Fund.
11. INDEMNITIES OR WARRANTIES
In the ordinary course of its business, the Company may enter into contracts
or agreements that contain indemnifications or warranties. Future events could
occur that lead to the execution of these provisions against the Company.
Based on its history and experience, management believes that the likelihood
of such an event is remote.
12. SCHEMES OF ARRANGEMENT COST
For the six-month period ended 30 June 2022, the Master Fund recorded an
amount of $178,592, in addition to the $27,232,774 incurred in 2021, for legal
fees and restructuring costs in relation to the Schemes of Arrangement, of
which $27,380 and $4,437,070 were allocated to the Company in 2022 and 2021,
respectively. Additionally, the Company incurred direct expenses relating to
the finalisation of the Schemes of Arrangement in the amount of $368,733 and
$229,415 in 2022 and 2021, respectively.
Per the Schemes of Arrangement Buy-Out agreement, after closing of the Schemes
no additional fees or expenses will be deducted from distributions of the
Closing NAV and there will be no continuing management fees charged by the
Investment Manager (any such fees will have been accelerated and included in
the Ordinary Course Fees for the Run-Off of the Funds). Post-closing of the
Schemes with the Closing NAV effective 31 January 2022, the Company incurred
operational costs totaling $452,198 which were charged against the $3,384,953
total accelerated reserves Schemes of Arrangement Buy-Out Ordinary Course Fees
as disclosed on the condensed Statements of Assets and Liabilities.
13. SUBSEQUENT EVENTS
Effective 1 July 2022, the Investment Manager successfully implemented a move
to quarterly reporting as one of the Company's cost savings mechanisms. The
move to quarterly reporting also aligns the Master portfolio results with
cedants' quarterly loss reporting.
On 11 August 2022, the Company released a portfolio update advising of a
further release of Side Pocket Investment ("SPI") capital which is expected to
be paid to the Company towards the end of Q4 2022, and which the Company
intends to use to carry out an eighth compulsory partial redemption of its
issued share capital.
These Financial Statements were approved by the Board and available for
issuance on 14 September 2022. Subsequent events have been evaluated through
this date.
For further information:
Markel CATCo Investment Management Ltd.
Judith Wynne, General Counsel
Telephone: +1 441 493 9005
Email: judith.wynne@markelcatco.com
Mark Way, Chief of Investor Marketing
Telephone: +1 441 493 9001
Email: mark.way@markelcatco.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260 1000
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